In a week dominated by earnings news from many prominent companies (more below), we did get some important economic reports today. The headline release came at 8:30 A.M. (EDT) when the Commerce Department reported that the first-quarter gross domestic product (GDP) expanded by an estimated 1.1%, which was down from the fourth-quarter reading of 2.6% and short of the consensus forecast of 2.0%. Of note, the Personal Consumption Expenditures (PCE) Price Index rose 4.9% during the three-month period, compared to 4.4% in the final quarter of last year. Meanwhile, initial employment claims for the week ending April 22nd totaled 230,000, which was down 15,000 from the prior-week figure. Treasury market yields moved upward on the higher-than-expected PCE Price Index and better-than-expected employment data.
Those two reports, along with tomorrow’s data on March personal income and spending, which includes the PCE Price Index, are likely to be closely monitored by the Federal Reserve for signs of inflation and whether the central bank’s most restrictive monetary policy course in four decades is starting to tame price growth. The Fed will hold its May Federal Open Market Committee (FOMC) meeting next week, and the consensus is that the lead bank will raise the benchmark short-term interest rate by a quarter point, to 5.00%-5.25%. We think that what Federal Reserve Chairman Jerome Powell has to say about the June meeting will have more of an impact on trading next week. The consensus expectation is that the Fed will pause at the June meeting, especially with the ongoing banking worries, which were brought into focus again with the dire situation at regional lender First Republic Bank (FRC), which is looking for a lifeline to remain solvent after experiencing the same liquidity problems that now defunct Signature Bank and Silicon Valley Bank did in March.
Nevertheless, the main focus of Wall Street remains on the ongoing earnings season, which has been the primary reason, along with the aforementioned banking concerns, behind the choppy week of trading on Wall Street. Earnings reports produced a bifurcated day for the major equity averages yesterday. The Dow Jones and S&P 500 Index finished in negative territory, with selling picking up during the final hours of the session. Mixed earnings news were behind the uneven performance. A weak quarterly report and outlook from package carrier United Parcel Service (UPS), whose results are seen as a barometer for the health of the U.S. economy hurt the economically sensitive sectors. Conversely, the higher-growth technology stocks rallied after Tuesday’s selloff, helped by a strong quarterly performance from technology behemoth Microsoft (MSFT).
Earnings news is again having a big impact on trading this morning, with the equity futures indicating a higher opening for the U.S. equity market, though off of their early morning peaks following the economic reports. After yesterday’s closing bell, the headline report came from Meta Platforms (META). The social media giant and virtual reality producer delivered earnings per share of $2.20, on stronger-than-anticipated revenues growth. The parent of Facebook and other platforms also reported better-than-expected daily active user account growth and said it is seeing some relief on the cost side of the business. Shares of the company are trading sharply higher in pre-market action. Fellow technology company ServiceNow (NOW) beat both revenue and earnings estimates, but kept prior forecasts for the year in place, which indicates a likely slowdown in demand for the company’s cloud computing services in the second half of this year. Shares of the tech company are looking at a slightly lower opening today.
The quarterly releases did not stop with the aforementioned tech giants. eBay (EBAY) delivered slightly better than expected results on the bottom line and the stock is responding in kind. Online streaming service company Roku (ROKU) beat revenue expectations, but fell short on the profit line. The investment community liked the increase in the number of users, and Roku’s better-than-expected outlook. The share price is nominally higher on the mixed, albeit unexciting, results, with some buying of a stock that was notably shorted coming into the earnings report. Toymaker Mattel (MAT) reported a wider than expected first-quarter adjusted share loss, citing inventory concerns after a not so great holiday season for the company.
On the busiest day for quarterly releases this cycle, the earning news was mostly positive. Large-cap drug maker Ely Lilly & Company (LLY) fell short of earnings targets, but raised its full-year profit forecast and the stock is higher in pre-market action, Dow-30 component Honeywell (HON) beat expectations and raised its full-year revenue guidance and that stock is presaging a modestly higher start. Likewise, shares of Comcast Corp. (CMCSA) are looking at an up opening after the communications services giant exceeded first-quarter estimates and reported growth in broadband Internet service customers.
In general, the theme developing on Wall Street is that quality companies that have shown an ability to protect their profit margins have been in favor among investors. The services companies have done a better job of defending their margins than some of the goods producers. Given this backdrop, we believe our continued recommendation that subscribers should focus on the stocks of high-quality companies that have a track record of producing steady earnings and cash flows, even during difficult economic times, while maintaining their dividend payments, will prove astute, especially if the U.S. economy is headed toward a recession. Keeping a healthy position of cash in one’s portfolio also is recommended at the time.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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